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CRE Money Managers 215% More Confident In Infrastructure Allocations This Year

As the U.S. nears its longest period of economic recovery ever, top commercial real estate executives are eyeing infrastructure investments as an untapped market for yields this year.

Infrastructure project, infrastructure spending

In its second annual Real Confidence Executive Index survey, CRE advisory firm Altus Group dissected the real estate preferences of 65 top CRE executives from private equity firms and REITs, including Blackstone Real Estate Group, Prudential Real Estate and Avalon Communities. The survey provided each exec with a hypothetical $1B and asked how he/she would invest it into a portfolio using both private/public equity and debt to produce the highest returns possible in one year.

Respondents overwhelmingly turned to infrastructure as a safe bet this year, allocating 15.5% of the REIT investment to infrastructure spending. That’s a 215% increase in infrastructure bets this year compared to 2016. Much of the shift in focus has to do with President-elect Donald Trump’s plan to invest $1 trillion in projects throughout the U.S., Altus Group director of research Chuck DiRocco told Bisnow. Trump just tapped longtime real estate moguls Richard LeFrak and Steve Roth to oversee his infrastructure agenda.

Private equity funds and REITs are also looking beyond the primary commercial property sectors to alternative options like infrastructure in search of returns because most sectors (particularly hotel and office), are maturing and rising interest rates are expected to compress cap rates.

“This infusion of capital and more spending in the infrastructure arena sounds fantastic, but there’s obviously a lot of red tape to get through to get these things passed and where we need it,” DiRocco said. “But if they can build on infrastructure and ease regulations, I think we need that revival and that development.”

Industrial And Multifamily Remain Favorites

Chuck DiRocco, Altus Group

Though execs raised their bets on infrastructure projects, industrial real estate topped portfolio allocation. Those surveyed favored industrial investment far beyond any other sector, putting 23.2% of their hypothetical funds into industrial REITs, and 34.4% into direct industrial real estate investments.

Availability for industrial space declined for the 27th consecutive quarter in Q4, continuing its record-breaking streak of net occupancy gains, according to CBRE’s latest report. Even taking into account the softening in demand that experts project may hit this year, e-commerce continues to drive this sector, keeping supply from catching up with demand.

“The big key thing to jump on is the large interest in industrial and that allocation as a whole; it’s increased on the private equity side and REIT side in regards to their dollar allocation. Our executives believe this is really a key economic driver across the board and good for GDP,” DiRocco said.

CRE executives still see room for growth in the multifamily sector as well, even as oncoming supply is expected to negatively impact rents and vacancy rates in major markets. One positive, experts say, is that the oncoming supply remains on the higher end, so Class-B and Class-C apartments in suburban markets have a healthy balance of supply and demand. Those surveyed by Altus poured $9.7B or 14.9% of their funds into multifamily projects, making it the second most popular sector. 

CORRECTION, JAN. 18, 12:25 P.M. ET: A previous version of this story listed the wrong figures for multifamily investment allocations. Those figures should read 14.9% and $9.4B. In addition, Bisnow has added context to clarify whether the hypothetical funds invested were solely placed into REITs, or allocated for both private and public equity. The story has also been updated to mention the firms of a few commercial real estate executives who participated in the survey.